business essay

AirAsia

Published: 23, March 2015

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Abstract

AirAsia was the first successful low cost airline in the Southeast Asian region. This case study discusses the factors that contributed to AirAsia's success. It studies the influence of culture and leadership at AirAsia, the factors contributing to its operational efficiency and the strategic orientation of the airline. It also discusses the threats to the long-term success of the airline with reference to increasing competition in the region and the need to overcome certain service shortcomings. The case concludes with an assessment of AirAsia's future plans.

To study the growth of the pioneer of low cost airlines in the Southeast Asian region

To analyze the reasons for the success of a low cost airline in Southeast Asia, a region where analysts felt there was no market for low cost services

To understand the operational model followed by the airline and how it contributed to its success

To examine the relationship between leadership and culture and the need for a strong and dynamic leader in a startup organization

To understand the threats to the airline's long-term success and how these may be overcome

To analyze the growing low cost trend in the Southeast Asian region and the market potential for the same

AirAsia was not the first budget carrier in Asia (although it was the first in the Southeast Asian region). The low cost trend actually started in Asia in the 1990s, when two budget airlines - Air Do and Skymark Airlines were launched in Japan. However,
neither of the airlines succeeded as their operational model was weak and they were soon 'out discounted' by Japan's major airlines - Japan Airlines, All Nippon Airways and Japan Air System. Another budget airline, Cebu Pacific Air, operated
flights between Hong Kong and Seoul to the Cebu Islands in the Philippines, but its operations were limited. Otherwise, it was the national flag carriers that dominated the region...

According to analysts, AirAsia's main appeal was its low fares. By offering fares that were a fraction of what major airlines charged, AirAsia created a new market in the Southeast Asian region. People who could otherwise not have afforded air travel began to fly AirAsia... Analysts generally agreed that AirAsia's success had significantly changed the dynamics of the Southeast Asian aviation industry. However, they said it would be premature to call the airline an unqualified success. AirAsia was set up in 2001, which was a bad time for the global aviation industry. Despite this, it managed to develop a successful business model. However, the airline industry had witnessed a number of cases where airlines started off well but later experienced a downturn...

In early 2005, AirAsia Sdn Berhad (AirAsia) announced that it would give away 10,000 free seats on its flights to select Southeast Asian destinations.The airline said that was its way of celebrating the completion of three years of successful flying and of saying thank you to the people for their support. "AirAsia's accomplishments and success today is a reflection of the public's trust and faith in the company,"said Tony Fernandes (Fernandes), CEO of AirAsia. The airline also wanted to thank the public for making its late-2004 shares issue a huge success. One of the most successful airlines in the Southeast Asian region and the pioneer of low cost, no frills travel in Malaysia, AirAsia was often in the news for its low fares and fast growing operations Until AirAsia proved them wrong, airline analysts believed that budget carriers would not find a market in Asia. They said the Asian airline industry was different from the industries of the US and Europe - airline passengers in Asia looked on air travel as a luxury, and expected to be pampered by the airlines. For this reason, no-frills travel would not appeal to them. In addition, Asian countries had a great amount of red tapism, which made it difficult to start any new venture, not least of all, an airline. Major national airlines in most of the countries also enjoyed government backing and were too powerful to allow competition to flourish. Therefore, when AirAsia was set up in 2001, it was greeted by a large amount of skepticism.

The airline industry was not a good place to be in at that time, reeling as it was from the combined effects of the September 11 terrorist attacks, Severe Acute Respiratory Syndrome (SARS), and economic downturn. However, within three years of operation, AirAsia changed the dynamics of the Asian airline industry. It not only managed to compete with major carriers
like Malaysian Airlines (MAS) and Singapore International Airlines (SIA), but it also became the benchmark for several other low-cost airlines in that market. So great was AirAsia's impact that analysts said the airline, with its minimal fares, was living up to its tag line which said 'Now Everyone can Fly'.

Against All Odds

In 2001, Dato' Sri Tony Fernandes Fernandes started his career as a music industry executive, working at Virgin Records and Time Warner Music It was his childhood dream to run an airline, but he did not consider the idea seriously until he saw
easyJet, a London-based low cost airline, on television. Fernandes was impressed with what he saw of easyJet and decided that he wanted to explore its operations further. He spent two days at easyJet's headquarters in Luton airport, talking to staff and passengers and learning how the airline was run. Fernandes had always believed that a low cost airline would be successful in the Southeast Asian region, and his experience at easyJet convinced him of the potential of his idea. He resigned from his job at Time Warner Music and returned home to Malaysia . Fernandes had no prior experience in running an airline, nor did he have enough money to start one. He raised money by mortgaging his house and using up his savings. He also roped in three of his associates - Datuk Pahamin A. Rajab, Abdul Aziz Abu Bakar and Kamarudin Meranun - who believed in his vision for a low cost operator in Malaysia. Getting an airline license was not easy in Malaysia. The partners set up a meeting with the Malaysian Prime Minister, Dr. Mahathir Mohamed (Mahathir), and presented to him the major features of their business model...

along with Dato' Pahamin Ab. Rajab (Former Chairman, AirAsia), Dato' Kamarudin bin Meranun (Deputy Group Chief Executive Offi cer, AirAsia) and Dato' Abdul Aziz bin Abu Bakar (Current Chairman, AirAsia) formed a partnership to set up Tune Air Sdn Bhd and bought AirAsia for a token sum of RM1.00. With the help of Conor Mc Carthy
(Director, AirAsia; former Director of Tune Air Sdn Bhd and former Director of Group Operations, Ryanair), AirAsia was remodeled into a low cost carrier and by January 2002, their vision to make air travel more aff ordable for Malaysians took fl ight.

Valued at RM2.3 billion, AirAsia is today an award winning and the largest low cost carrier in Asia. From a two aircraft operation of Boeing 737-300, AirAsia currently boasts a fl eet of 78 aircraft that fl ies to over 60 domestic and international destinations and operates over 500 domestic and international fl ights daily from six hubs located at Low Cost Carrier Terminal (KLIA), Johor Bahru, Kota Kinabalu, Bangkok (Thailand), Jakarta (Indonesia) and Bali (Indonesia).

AirAsia is fast spreading its wings to create a bigger and more extensive route network through its associate companies, Thai AirAsia and Indonesia AirAsia. The airline has carried, thus far, over 61 million guests since its fi rst day of operation.

At AirAsia, we are bringing people closer by bridging boundaries through our philosophy of off ering low fares. It has sparked a revolution in travel, as more and more people from all walks of life are now able to fl y for the first time, while many others have made air travel with AirAsia their preferred choice of transport. We are consistently adding new routes, which include city pairs that never existed before, in our relentless eff orts to create a seamless bridge of unity across Asia. It is something very close to our hearts as we continuously strive to promote air travel and create excitement amongst our guests with our range of innovative products and personalised services.

Corporate Vision, Mission and Values
Vision-To be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with
poor connectivity and high fares.

Mission

To be the best company to work for whereby employees are treated as part of a big family

Values

Safety Adopting a zero tolerance to unsafe practices and strive for zero accidents through proper training,
work practices, risk management and adherence to safety regulations at all times.
Valuing Our People Committing to our people's development and well-being and treating them with
respect, dignity and fairness.
Customer Focused We care and treat everyone in the same manner that we want to be treated.
Integrity Practicing highest standards of ethical behaviour and demonstrate honesty in all our lines of
work in order to command trust and mutual respect.
Excellence in Performance Setting goals beyond the best and reinforcing high quality performance standards
and achieving excellence through implementing best practices.

Commitment To Excellence

AirAsia is committed to excellence. We intend to excel in everything we do by achieving exceptional results. We have set high standards, but no higher than our customers' expectations. Day after day, our people do their best so that we meet these expectations. In all our eff orts, there are five fundamental values: Safety, Passion, Integrity, Caring and Fun. They provide a frame of reference for the AirAsia experience and a corporate culture in which we live and deliver peak performance.

The business models

AirAsia's success has taken flight through the continued confi dence of our guests who prefer a no-frills, hasslefree, low fare and convenient option in air travel. The key to delivering low fares is to consistently keep cost low. Attaining low cost requires high effi ciency in every part of the business and maintaining simplicity. Therefore every system process must incorporate best industry practices. We make this possible through the implementation of the following key strategies:

Safety First - Safety is the single most important criteria in every aspect of the operations, an area that AirAsia will never compromise on. AirAsia complies with the conditions set by regulators in all the countries where the airline operates. In
addition, AirAsia partners with the world's most renowned maintenance providers to ensure that its fleet is always in the best condition. AirAsia has committed itself to a program of reducing risks and hazards normally associated with our industry through a Safety Management System. This commitment is extended to ensure the full integration of a safety culture, safety policy and safety objectives in a proactive approach to aviation safety. In short, our Safety Management System is not just an add-on but a core part of our business process. It is the way we do business. The critical safety functions of senior management are in the areas of strategy and leadership. Senior management will provide a vision for safety management and provide adequate resources to achieve this level of safety

High Aircraft Utilisation - AirAsia's high frequency flights have made it more convenient for guests to travel as the airline implements a quick turnaround of 25 minutes, which is the fastest in the region. This has resulted in high aircraft utilisation, lower costs and greater airline and staff productivity. Efficient Fleet, AirAsia continues to invest in new aircraft. As of the end of 2008, the Group received a total of 56 Airbus A320 aircraft and the deployment is as follows.
Malaysian operations has received 46 and is now a fully Airbus A320 aircraft feet. Thailand operations has received six and Indonesian operation, four. Our fl eet is among the youngest in Asia and we will get even younger as we take delivery of 14
Airbus A320 aircraft and retire nine older Boeing 737-300 "Classics" aircraft in 2009. These Airbus A320 are ultra modern, more fuel effi cient and environmentally friendly aircraft with unparalleled levels of passenger comfort, serviceability and reliability. We have received positive feedback that our passengers love this aircraft. These aircraft have reduced operational cost signifi cantly and helped to deliver strong profi ts.

Low Fare, No Frills - AirAsia targets guests who are prepared to do away with frills such as meals, frequent flyer miles or airport lounges in exchange for fares lower than those currently off ered without comprising on quality and service. Guests have the choice of buying exclusively prepared meals, snacks and drinks from our in-fl ight service at an aff ordable price. While onboard AirAsia the best thing to do, of course, is to eat and drink. We will help you do that by off ering a vast selection of food and drinks without punching a hole in your wallet. And our fun and friendly crew will ensure the merriment part of your travel experience.

Streamline Operations - Making the process as simple as possible is the key to AirAsia's success. We are working towards a single aircraft fl eet; this greatly reduces duplicating manpower requirements as well as stocking of maintenance parts. There is only one class seating, i.e. fi rst class, and passengers are free to sit where they choose.

Lean Distribution System - AirAsia off ers a wide and innovative range of distribution channels to make booking and traveling easier for its guests. AirAsia's ticketless service provides a low cost alternative to issuing printed tickets. Simple Distribution System Simple is good, simple is what we want and simple is what we all need. Bearing this in mind, we have worked
very hard through countless hours of research and development to ensure that our distribution system is, simple. It is ironic that so much work is required to be 'simple' but bear in mind that 'simple' is a relative word when you are catering to the needs of millions of people across the world. We have developed a comprehensive, yet simple distribution system. One that is capable of handling the most technologically savvy customer to the most technologically deprived. Our website www.airasia.com
is available in seven languages and our call centre is conversant in the major spoken Asian languages. For those always on the go, you can book a fl ight using your mobile phone at www.mobile.airasia.com We have recently upgraded our self check-in machines with a simpler and more powerful version. The transaction takes not more than two minutes to complete. This new
machine also has an advanced security feature which eff ectively cuts the risk of fraud. We have also expanded our web check-in facility to all stations and destinations. You can now use the web check-in facility even if you have baggage (previously
web check-in was only for passengers without baggage). Simply stroll over to the baggage drop off counter - every station has one - and then proceed to the departure hall for your fl ight. If you have not tried any of these convenient services, I
recommend you do so the next time you fl y with AirAsia. Not only will it save you valuable time and eliminate the stress of queuing up, it will also reward AirAsia in the form of lower cost - and thus lower my stress. It's amutually healthy proposition!

Point to point network - The LCC model shuns the hub-andspoke system and adopts the simple pointto-point network. All AirAsia fl ights are shorthaul (four hour fl ight or less). The underlying business is to get a person from point A to B. On Time Performance, Nothing irks airline passengers more than a delay. Often, these delays are caused by factors beyond our control -
when Mother Nature throws a fi t, for instance - but we can try to mitigate these occurrences by ensuring that we take actions within our control to do so. One of the benefi ts of a young fl eet is reliability. AirAsa's On Time Performance (OTP) has improved by nine percentage points since the fi rst Airbus A320 aircraft was inducted into our fl eet. The graph below indicates OTP will rise with more Airbus A320 aircraft in the fl eet. We will back test this conclusion and aim for 92% OTP
in 2009. If we succeed, it will make us the most punctual airline in the world. In line with our confi dence in achieving this goal, we have launched a revolutionary campaign called On Time Guarantee (OTG). In a snapshot, this campaign compensates a passenger inconvenienced by a substantial delay due to our fault - at no additional cost. We believe this pioneering and unique campaign will help to boost the retention rate and raise our brand equity.

AirAsia Today

AirAsia flies over 100 routes across 12 countries in Asia. The fast-growing airline has become Asia's eigth-largest airline in six years, and is now the largest low-cost carrier in Asia, with the lowest cost base of any airline in the world. According to AirAsia, the key to delivering low fares is to consistently keep costs low - which requires high efficiency in every part of the business, with every system process incorporating best industry practices.

How they do it

Ultimately, it is our guests who have made us what we are today. A passion for exceeding our guests' expectations
is what spurs us to relentlessly pursue innovative ways to enhance the service we provide. Constant innovation
is the tool we use to expand our guests' freedom to travel so that Now Everyone Can Fly.

In 2008, a total commitment to innovation enabled us to stay ahead of the game and once again win an array of prestigious awards. In the years to come, the same commitment will see us successfully navigate the ongoing global economic turbulence, broaden our horizons and not only survive but prosper.

In 2009 we will unroll a series of initiatives designed to boost customer service while keeping fares down. So it is apt that this year's Annual Report focuses on innovations which will enable AirAsia Berhad ("AirAsia") to retain its pole position as the world's preferred low fare airline. Above all, it is appropriate for us to acknowledge the support our guests give us by making Thanks to YOU the key message of this report.

The Asia-Pacific aviation industry is enjoying strong passenger demand. According to the International Civil Aviation Association, passenger numbers in the region grew more than 12 percent in 2007, supported by rising economies, increasing business travel, and growing disposable incomes.

Making Innovations - Just for You

Why is AirAsia performing so well? The answer couldn't be any simpler: AirAsia grows because it saves money for people. Nobody
wants to part with their money whenever possible, but I am certain that almost everyone likes to travel. So, sensibly, people look for the lowest cost option with fi rst class service. Providing fi rst class service is imperative for any service oriented company, customers simply won't have it any other way. We realise this importance and have consistently upgraded our service level, and succeeded in doing so without any compromise to effi ciency and cost. I will explain in the following pages our initiatives - present and future - to enhance customer service delivery. Some are innovative ideas inspired by the talented people of AirAsia and some are simple but functional moves that came from other sources.

Expanding the Route Network

In 2008, we achieved many milestones. The one closest to my heart is our entry into Singapore. For too long, passengers
on the Malaysia to Singapore route were burdened with high fares extracted by the monopolistic nature of the route operators.
This is no longer the case - AirAsia introduced unheard-of low fares on a route that has proven to be high-yielding and is expected to deliver sustained profi ts. We have six destinations linking to Singapore at the end of 2008 and this number will double by the end of 2009. For years, we have gazed upon India and waited for an opportunity. That day fi nally came and our maiden route, Kuala Lumpur to Tiruchirappalli, has been a resounding success. There is plenty more to come, we currently
have on our radar screen to commence services to Coimbatore, Kochi and Kolkata. India presents a fantastic opportunity for AirAsia and I envisage it as one of our biggest markets in years to come.of growth with 39% more passengers carried than the
year before. This signifi cantly outpaced the domestic Malaysia passenger numbers that grew by 13%. While we continue to see and capitalise on opportunities in Malaysia, we expect the higher rate of growth in international sectors to continue.

With the launch of AirAsia X, AirAsia's route network has evolved from being Asia-centric to include Australia and Europe. The impact of this connectivity - for instance, connecting Australia and London by providing an alternative, aff ordable version of the so-called Kangaroo Route - is being felt not just by AirAsia but by Malaysia. Our route connectivity and the frequency
of our fl ights is now turning Kuala Lumpur into the premier regional hub for low-cost travel. Our services in boosting tourism in Malaysia are helping to alleviate some of the pain infl icted by the global economic downturn. Our investments in these new routes and in boosting the Malaysian economy demonstrate our unwavering commitment to the nation and its people.

The Chanllenge

Implement low cost promotions with high efficiency and best industry practices

Create and implement print and web campaigns on a very tight delivery schedule

Integrate and implement internationally across multiple languages and media

Benefits

Accelerated creation to delivery model

High quality implementation at a low cost

50 percent increased productivity in creative turnaround and output

Industry Overview and Challenges

The Asia-Pacifi c aviation industry is facing one of the most challenging period since the 1997 Asian financial crisis. According to the International Air Transport Association (IATA), passenger numbers in the Asia Pacifi c region shrunk by 1.5% in 2008 and is expected to contract by a further 0.6% in 2009. Financial loss projections paint an even more dismal scenario - Asia-Pacifi c airlines posted a US$500 million loss in 2008, with the loss forecast to balloon up to US$1.5 billion in 2009.

The competitive environment has gone awry amid confusion. Many airlines have terminated underperforming services, deferred scheduled aircraft deliveries and frozen excess capacity in an attempt to reduce their cost base. Legacy carriers are also slashing fares on main routes, often putting themselves in direct competition with low-cost airlines such as AirAsia. I am confi dent, however, that we will more than hold our own. AirAsia is not just about low fares. Our route connectivity, the frequency of our fl ights, Industry leading punctuality, the 5-Star quality of our service and our determination to excel in everything we do provides our customers and guests unparalleled value

We welcome fair competition conducted on a level playing fi eld because we are confi dent we can triumph over all comers.
In fact, we are noticing an upsurge of interest in fl ying AirAsia by the corporate sector as it seeks to cut travel costs for its executives by switching to us instead of using legacy carriers. This is just one example of how the current economic downturn has benefi ted us and we have good reason to believe there are many more.

Our market share will likely grow in 2009, partly because much of the rest of the industry is in acute distress.

Going forward

The critical qualities needed to navigate through the current economic turbulence are a focus on innovation, maintaining tight discipline in line with the low-cost model, creative marketing and an unwavering self belief. As many of you are aware, I am an incorrigible optimist. I look for silver lining in any situation and I am confi dent that the economy will rebound. I am also a person who fi rmly believes in lighting a candle rather than cursing the darkness. Which is why we made the painful decisions we made and have put in place strategies that will see us through this uncertain period and continue to deliver long-term value to our customers, shareholders and all our other stakeholders. Unit cost is expected to reduce substantially stemming from our decision to purchase fuel on the spot market, the benefi ts of a younger fl eet and economies of scale. The current price of fuel is substantially lower than the US$128 per barrel that we paid in 2008. The benefi t of the lower fuel price goes straight to the bottom line. With these gains in hand, 2009 will be a strong year for the Group. It's been an extremely eventful and exciting year. The Board of Directors and I are pleased and proud to be leading our talented and committed employees as we begin this new chapter in the history of AirAsia. We have every confi dence that the future will be both successful and full of opportunities.

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